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Larimore v. Comptroller of Currency

April 30, 1986

BERNIECE LARIMORE, SAM M. TAYLOR, WILLIAM G. BUTCHER, AND ORVILLE BOTTRELL, PETITIONERS,
v.
COMPTROLLER OF THE CURRENCY,*FN* RESPONDENT



On Petition for Review of Decision of the Comptroller of the Currency. No. AA-EC-82-42

Author: Coffey

Before CUMMINGS, Chief Judge, BAUER, WOOD, CUDAHY, POSNER, COFFEY, FLAUM, EASTERBROOK, and RIPPLE, Circuit Judges.

COFFEY, Circuit Judge.

In Larimore v. Conover, 775 F.2d 890 (7th Cir. 1985), a panel of this court approved an order of the Comptroller of the Currency requiring the directors of the First National Bank of Mt. Auburn, Illinois ("Bank") to reimburse the Bank for losses resulting from the director's approval of loans in excess of the legal lending limit contained in 12 U.S.C. § 84. The Comptroller of the Currency brought this action pursuant to the cease and desist provision contained in 12 U.S.C. § 1818(b)(1). We granted the petitioner's request for rehearing in banc to address the issue of whether 12 U.S.C. § 1818(b)(1) gives the Comptroller of the Currency the authority to order an individual director of a nationally chartered bank to personally indemnify the bank for losses resulting from his participation in violating 12 U.S.C. § 84. While no specific case law has addressed whether the Comptroller has the authority to impose personal liability, our review of the relevant statutes, 12 U.S.C. §§ 93(a), 1818(b)(1), and their legislative history reveal that the Comptroller has no such authority, and thus we vacate the order of the Comptroller and dismiss this action.

I

The record reveals that in late 1979 and continuing into 1980 the First National Bank of Auburn board of directors approved loans to Porter Construction and Twin County Trucking Companies in excess of the statutory limit. Title 12 U.S.C. § 84 provided that: "The total obligations to any national banking association of any person, copartnership, association, or corporation shall at no time exceed 10 per centum of the amount of capital stock of such association actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund."*fn1 An OCC audit of the Bank in September 1980 revealed loans in excess of the statutory limit to the Porter Construction and Twin County Companies. In its report to the Bank, the Office of the Comptroller of the Currency ("OCC") admonished the directors that its lending procedures were improper, ineffective and in need of immediate revision, stating, "It is necessary that directors exercise more effective supervision over the loan area." In addition, the September 1980 report reviewing the Bank's operations reflected that the OCC advised the directors that they faced potential personal liability for granting loans in excess of the statutory lending limit. Subsequently, the Bank after receiving payments from the Porter Construction and the Twin County Trucking Company on their outstanding loans, reduced their respective lines of credit to comply with the ten percent lending limit. Shortly thereafter, in July 1981, the board of directors once again approved loans to Porter and Twin County Trucking Company in excess of the prescribed ten percent limit.

One-half year later, on January 7, 1982, the appellant Butcher joined the Bank's board of directors. Subsequent to this date, with Butcher present, the board once again approved additional loans to Porter Construction and the Twin County Trucking Company as well as additional loans to three other individuals in excess of the statutory lending limits. The minutes of the Bank's board meeting of March 4, 1982, indicated some concern on the part of certain members of the Board regarding the outstanding Porter Construction loan.

The OCC returned to the Bank on July 26, 1982, conducted another audit, and again discovered that Porter Construction, and the Twin County Trucking Company together with certain other bank customers' lines of credit exceeded the proper legal lending limits. On November 9, 1982, the OCC served the Bank board of directors with notice of a violation of 12 U.S.C. § 84 in granting loans in excess of the statutory limits and commenced administrative proceedings pursuant to 12 U.S.C. § 1818(b)(1) to obtain a cease and desist order against the Bank and its directors.*fn2 Section 1818(b)(1) of Title 12 provides:

"(b)(1) If, in the opinion of the appropriate Federal banking agency, any insured bank. .. or any director, officer, employee, agent, or other person participating in the conduct of the affairs of such a bank is engaging or has engaged, or the agency has reasonable cause to believe that the bank or any directors .. . or other person participating in the conduct of the affairs of such bank. .. is violating or has violated. .. a law, rule, or regulation. .. the agency may issue and serve upon the bank or such director .. . a notice of charges in respect thereof.. . .

In the event. .. the agency shall find that any violation .. . specified in the notice of charges has been established, the agency may issue. .. an order to cease and desist from any such violation or practice. Such order may. .. require the bank or its directors .. . to cease and desist from the same, and, further, to take affirmative action to correct the conditions resulting from any such violation or practice." (Emphasis added.)

After the administrative law judge ("ALJ") hearing the case determined that the directors had approved loans in excess of the statutory limit, the OCC requested the ALJ to assess personal liability and damages against each director for the losses arising from these loans in excess of the statutory limits.*fn3 The ALJ agreed with the OCC's position and imposed personal liability upon each of the bank directors, except for Butcher. The ALJ ruled that the directors "knew or should have known that they were approving extensions of credit in violation of Section 84. .. ." The ALJ found, however, that Butcher "did not know, nor. .. have reason to know, that he was approving loans in violation of Section 84." The ALJ reasoned that:

"Respondent Butcher became a member of the BOARD on January 7, 1982. He had no prior experience as a bank director. At no time before the commencement of the Bank examination on July 26, 1982, was he informed of the total amount of the line of credit extended to any borrower from the BANK. Moreover, he was not aware of the October 1980 Report of Examination before July 1982.

...The record does not show that respondent Butcher was put on notice to make inquiry into the facts surrounding the approval of loans by the BOARD." (Emphasis in original).

Upon return of the case to the OCC, the Comptroller disagreed with the ALJ's decision regarding the nonassessment of liability and damages against Butcher, and ruled that he (Butcher) should have known that he was approving loans ...


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